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Richard Cha

How would you change the UK tax system to improve future employment prospects and drive the UK
economy?

Since 2010 London has created 10 times more private sector jobs than any other city accounting for 80%
of private sector job growth. The Centre for Cities think tank's chief executive Alexandra Jones (from
which the statistic above came) remarked that the UK ‘is one of the most centralised countries’ in the
OECD. More of its public spending now comes from central government than in any OECD country except
New Zealand. Moreover, its local government is weaker than nearly any comparable country, including
France. She added that cities around the UK should be ‘allowed to take their own decisions’. In light of
this, this essay shall seek to explore practical decentralised fiscal reform and investigate how devolving
some financial and fiscal powers to London and other UK core cities could potentially develop a
competitive environment for cities empowering local leadership and creating jobs. The aim of this essay is
not to provide a complete and polished package of taxes that cities might possibly be handed from
Whitehall but rather present a vision of how a genuine rebalancing of the UK economy might demand core
British cities to be bestowed fiscal freedom to invest in and drive the national economy. It can no longer be
disputed that cities internationally are on the rise and are the nucleus to modern civilization but if the UK
continues its existing centralised fiscal model, which could be argued is suboptimal in allocating raised
taxes to the pivotal investment cities need to maximise their growth potential, it will not only be to the
detriment of the UK’s cities but to the whole of the country at large.

The rest of the essay shall proceed as follows: Section I will examine the deficiencies of the current
centralised fiscal model. Section II shall advance the case for a possible alternative model concentrating on
greater fiscal devolution to UK cities. Section III specifically addresses how decentralised fiscal reform
could improve future employment prospects and drive the UK economy. Finally, Section IV will conclude.

Section I

Discussions surrounding tax reform must first acknowledge some of the current tax system’s limitations
and inadequacies. Admittedly, no tax system is perfect but taxation in the UK is highly centralised when
compared to other countries. Arguably, greater revenue raising responsibility for a region or city as well as
expenditure autonomy can improve accountability and transparency by providing a stronger and more

London and the Southeast were responsible for 37% of the UK's growth in output. Centralisation of revenue raising responsibility can also constrain incentives for ideal policy making at the local level. Since the crash of 2007. Furthermore. spending budgets (raised from taxes) determined by a central government are not directly linked to growth and the employment needs of a regional economy. Simultaneously. London is as structurally different to Newcastle.Richard Cha visible link between expenditure and tax choices. however. As London’s housing and transport infrastructure struggles to cope with the pressure of vast numbers of people wanting to live and work there. London has experienced quite the opposite. all with different regional economies so why should they therefore share the same tax rates and brackets? What if these cities shared the same taxes but had the power to set them at differing rates. Section II It has been contended that London’s portrayed economic boom has left the rest of Britain behind and has thus highlighted how this regional imbalance has raised some troubling questions surrounding who is enjoying the UK’s recovery. Against this background. high unemployment. To illustrate this whilst the economies of nearly every other part of Britain has shrunk since the crash. as Liverpool is distinct to Bristol. The relationship between the capital and the rest of the UK has even been portrayed as ‘A first-rate city with a second-rate country attached’. Against this context. Any tax system must consider the equitable outcome of its operation and with London and the Southeast regions appearing to benefit the most from recovery there is the notion that the current tax system is inadequate and insensitive towards these regional imbalances. or the preferences of regional and local population or their willingness to pay for the provision of services. regions and cities elsewhere in the country suffer from sluggish growth. a brain drain and fundamental lack of demand. Such deficiencies with the centralised tax system thus lead to inefficiencies in the decision-making process. Section II will examine a tax system with a greater appreciation of spatial differences. their share has rocketed to 48%. during the boom from 1997 to 2006. this part of the essay shall put forward and contemplate a tax system with an enhanced appreciation for spatial insights. A centralised tax system does not always provide regions with the freedom and flexibility to be able to tailor their taxes and spending to their requirements and thus have a greater share of the benefits of the national recovery and future growth. .

wasted time and money and less competitive cities’. said: ‘Our message is simple: free our cities from central control so they can create more jobs and economic growth…England’s great cities have a proud tradition of independence and ambition. Growing companies from outside the capital are in a permanent dilemma.Richard Cha London. ‘ManShefLeedsPool’. But London’s size and influence has arguably made it difficult for regional businesses to grow. This demonstrates perhaps how upon reaching a point of critical mass (or even critical success). only half of its listed companies were based within Greater London. apart from being the capital. Chair of the Core Cities cabinet and leader of Manchester City Council. Leese continues ‘we only directly control around five percent of the taxes raised within our cities…this means less local decision-making. offers itself as a leading global financial hub and it has been remarked how a City financier is more likely to travel to Beijing in a given week than to Birmingham due to its leading financial reputation and connectivity throughout the world because of its advantageous time zone. where businesses decide to base their operations (business rates) and where businesses decide to invest. A tax system empowering cities so they can become more competitive would provide incentives for firms to locate in the regions if local stamp duty tax rates. missed opportunities. Although it may not be as catchy as ‘BRICs’. published in September 2014. Sir Richard Leese. the latest term coined by Centre for Cities’s (and formerly of Goldman Sachs) Jim O’Neill could potentially have the same immense impact in the UK as a result of a more spatially aware tax system as it will have a larger impact on where people decide where to live (through city set income taxes). relocating to London is often considered a necessary step for further expansion. Only 7 percent of London’s taxes are retained by the Mayor of London and the London boroughs. Bristol mayor George Ferguson remarked that ‘Cities are this country’s principal drivers of . According to a survey by the Institute of Directors (IoD). Yet our ability to act on that ambition has been eroded as central state control of our finances has increased year on year’. more than two-thirds of managing directors in the UK favour tax powers being devolved to cities or regions south of the border. business rates and income tax rates were competitively set in comparison to other cities. When the FTSE 100 began in 1984. today the figure is over 70%. firms will decide to relocate to London and this will impinge on regional competitiveness and subsequently regional growth and output. If they succeed. this dilemma is to be lessened for firms then it may be absolutely necessary for cities to possess greater fiscal policy levers so as to attract and retain expanding businesses. If however. compared to 50 percent in New York and 70 percent in Tokyo. Moreover.

the home of several divisions of the BBC and ITN. The city has taken stock of its major assets and sought to build on them: the area around Manchester Airport. this section will focus on how the proposed decentralised tax system would impact on future employment . A spatially aware tax system providing core cities like Manchester with control over business rates. He added ‘That we’re so far behind many of our foreign counterparts in terms of devolving power to cities is a national embarrassment given the demonstrable benefits it brings elsewhere’. neutrality and its contribution to economic growth and efficiency among other factors. But how might a spatially mindful tax system look in practice? Ferguson suggested that it could start with devolving property taxes to cities before moving on to devolve local income taxes. the city has created a distinct identity and an integrated economic strategy. Section III A framework for presenting and appraising a potential tax system is usually required to gauge its effectiveness. a hitherto inadequate tram system.Richard Cha growth and it is vital that we’re given the freedoms we need to maximise this for the benefit of our regions and the national economy’. stamp duty. has been extended to connect Salford Quays to an increasingly vibrant city centre. the third busiest airport in the UK. New developments such as MediaCity. have created clusters of high value activity of the type that London currently monopolises. due to the essay’s brevity and title. The think-tank ResPublica published the report ‘From Devo Max to Devo Manc’ calling for an experimental devolution to take place in the Greater Manchester area. since the early 1990s. transparency. Some characteristics associated with tax systems may include its equitable (fairness) impact. output and the economy. The University of Manchester has doubled in size in less than a decade. But first some background. has been designated an enterprise zone and the MetroLink. However. council tax before others such as income tax and perhaps most ambitiously at some stage differential corporation tax rates between cities would generate a wider range of revenue streams at its disposal and without the ‘the fiscal grip of Whitehall’ the city would be able to invest in infrastructure and projects that mattered locally without having to rely on or wait for handouts from central Government. From this it is clear there is an appetite for the UK’s core cities to be endowed with greater control and the capacity to set their own taxes would be an impressive and substantial step toward cities reaching a greater levels of competitiveness driving growth. adequacy (meeting society’s revenue requirements).

with the freedom to set varying income and property taxes it may be argued that such taxes would participate in a ‘race to the bottom’ so as to encourage firm and worker relocation to its city over another. Arguably. both firms and individuals may often take the decision to locate in London. Healthy competition between cities with greater control over taxes would be good for economic growth through the competition it may create however. set too low by elected city representatives. The Business Secretary. How might this alternative devolved tax model improve future employment prospects? Aforementioned. Moreover. Regions are left weakened as talented workers leave for the capital. supports this view opining that the capital is ‘a giant suction machine draining the life out of the rest of the country’. However. and local projects would be prioritised as budgets were set by elected city representatives. for the sake of business or personal (and very possibly career) development. Taxes are unpopular with the electorate but are necessary to pay for government programs that are popular with the electorate. regional businesses and individuals alike often experience a similar predicament. firms and investors. has remarked devolution plans would mean that if local politicians failed to deliver (selecting unsustainable tax rates or bands) they ‘wouldn’t be able to hide behind Whitehall and Eric Pickles’. A devolved tax system could provide incentivising tax rates and bands for families. As Clive Betts. That said the opportunities would . Bestowing tax powers upon cities would naturally raise the local leaders to an elevated decisionmaking position and by extension require elected city officials to set tax rates.Richard Cha prospects and drive the UK economy and argue that cities have the potential to be the drivers of the UK economy promoting regional rejuvenation. Vince Cable. incapable of covering the expense of locally desirable projects and schemes would be brought to account. MP for Sheffield. the country’s brain drain to London harms the regions especially as one in three graduates between 22 and 30 move to London. taxes. A quasi-federal tax system in the UK furnishing cities with tax setting and collecting powers although conceptually radical would transform local politicians into highly accountable figures. workers. A devolved tax system where cities initially had control over property taxes and perhaps in time equipped with local income taxes and even corporation taxes would create incentives to firms and individuals to consider locating to metropolitan areas with the most competitive tax rates. cities would have to ensure that set tax rates would reflect and meet the basic needs of society guarding against tax rates being set too low. Taxes therefore possess a high place on any government or politician’s priority list.

this essay’s proposed alternative of a reformed tax system based on the recognition of the spatial economy (or regional economies) is paramount to the UK’s competitiveness and local jobs to slow down and possibly reverse the brain drain to London and Southeast. The full model of a devolved tax system where mayors and local politicians held significant tax setting powers from business rates to income taxes and possibly corporation taxes would insist on highly answerable locally elected politicians but would also present the opportunity for metropolitan areas to turn their fortunes around.Richard Cha be enormous. creating jobs and driving the UK economy through competition between cities. Section IV Aforementioned this paper did not aim to produce a fixed and finished parcel of tax powers that Westminster ought to hand down to UK cities but rather offer a vision for a decentralised tax system that would improve local employment opportunities by providing cities with tax and spending powers to attract and retain skilled workers and invest in city programs that Whitehall may not be sensitive to. Even a partially devolved tax system would encourage cities to provide tax incentives to local people and firms to stay rather than relocate generating jobs and providing competition between cities. In light of this. City tax and spend controls would improve the feasibility of such activities being undertaken. and Boris Johnson fights London’s corner. It is clear that even the Prime Minister is not out of touch on this matter and understands and appreciates the fact that cities and its locals often know what is best for their areas instead of the central government. most cities in England have no such outlet. As London competes for foreign business and investors. . When Alex Salmond speaks up for Scotland. There is no name synonymous with Manchester. creating positive multiplier effects in the area thus generating employment. output and beneficial competition between cities driving the UK economy. it should also prepare itself for a challenge from the provinces if granted tax powers. provide much needed local jobs and act as the engines of the UK’s economy. David Cameron said that ‘for too long our economy has been too London-focused and too centralised’. town centre regeneration projects or other locally desired schemes. whether public transport and infrastructure. Leeds or Newcastle. The Deputy Prime Minister concurred commenting that ‘a culture of Whitehall knows best’ is not conducive to national recovery and future growth. Local representatives are conceivably optimally placed to comprehend the particular needs of their regions. Mayors could galvanize a political consciousness for their cities and increase the city’s profile attracting investment.

Richard Cha P. said the government is finally recognising that the ‘socio-economic cohesion and success of the UK is dependent on strong. though all the members are moving forward. She asked. and rebalance the UK economy away from the current London-centric blueprint. This essay has sought to demonstrate that a devolved tax system could be a vital element of this realisation.Richard Cha Such inter-city competition would drive the UK economy to be able to reach its full economic potential. how far away do the ones at the back. Cameron promised to ‘share the proceeds of growth’ and used an analogy from Polly Toynbee’s book: Hard Work: Life in Low Pay Britain. In conclusion. . Yours Sincerely. Reforming the tax system so as to specifically address this imbalance is by no means a tokenistic step toward generating local jobs and driving the economy through increased regional competitiveness. if society is a caravan moving through the desert. In opposition in 2006. not one? Generally the English regions lack a distinct competitive advantage or identity and will continue to serve as the hinterland of Britain’s capital until significant powers and freedoms are granted.S. I have really enjoyed researching this topic and can only hope that you have as much enjoyment reading (and critiquing) my essay as I have had writing it. the allegorical English regions. have to fall before there are two caravans. successful cities’. Laurie Brennan. policy officer at Sheffield city council. this essay has sought to highlight that a tax system involving the significant empowerment of cities would stimulate regional growth and jobs.

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